Economy

Another highly contentious aspect of the EU referendum debate so far has concerned the economic costs and benefits of EU membership for the UK, and the economic implications of leaving or remaining within the Union. I need to add a disclaimer to this post: I am not an economist! But hopefully it is still possible to shed some light on the arguments for and against leaving the EU in economic terms.

How much does it cost to be a member of the EU?

There have been a huge number of different figures put forward in response to this question. It is clear that the UK pays more into the EU budget than it receives in economic contributions. The most accurate, up to date and reliable figures we have, according to independent analysts at Full Fact and the UK Statistics Authority, are as follows. In 2015, the UK Government contributed almost £13 billion to the EU budget. This is a discounted figure, since Margaret Thatcher secured a rebate for the UK from its budget contributions in 1985. This rebate in 2015 was worth almost £5 billion. This is not money that is sent to the EU and we then get back: it is calculated prior to the contributions being made. The total amount we received in economic contributions from the EU in 2015 was almost £4.5 billion. So, the net contribution we made in 2015 was almost £8.5 billion, or around £163 million a week. It may be useful to point out for the purpose of comparison that the NHS cost just over £113 billion in 2014/15, making the UK’s direct economic contributions to the EU the equivalent of around 7% of what is spent on the NHS.

Beyond these figures, it is incredibly difficult to identify accurately the economic costs and benefits of EU membership because of the wide range of available statistics and analyses that suggest contradictory things and which are subjective and based on a range of assumptions, as noted by the House of Commons Library. It is also important to consider that there are many costs and benefits of EU membership that have economic implications but may not be quantifiable, such as those related to trade. Nonetheless, there are some additional economic costs and benefits we can identify.

Some of the potential additional costs could include:

  • Impact on UK GDP (Gross Domestic Product – the value of goods and services that is used to determine a country’s economic performance) from being a member of the EU. The Institute of Economic Affairs (an economically right wing leaning think tank) argues that being a member of the EU costs 13% of the UK’s GDP every year. This is based on assumptions about the UK having free trade with the rest of the world outside of the EU, among others, and has been criticised by several other economists.

And potential additional economic benefits could include:

  • EU contributions made directly to the private sector in the UK, for example in 2013 it was estimated by the Treasury that the EU contributed around £1.4 billion to UK research organisations. This is not included in the £4.5 billion contributions to the UK noted above, as that included only public sector contributions.
  • Gains in productivity equivalent to 10% of GDP, as estimated by Economic Historian Professor Nick Crafts from Warwick University.

What will happen to the UK economy if we leave the EU?

It may not be appropriate to assume that costs and benefits we have experienced in the past will be replicated in the future, so it is very difficult to speculate about what the economic situation will or will not be should the UK leave the EU. Much depends also on what status the relationship between the UK and EU will have post-Brexit, for example would the UK enter the European Economic Area, like Norway, Iceland and Liechtenstein (this would also mean accepting the free movement of people from the EU into the UK, as I discussed in my earlier post on immigration); have some kind of bilateral trade agreement with the EU so that it could trade freely with few other obligations, or have no ties with the EU at all?

If we vote to leave the EU, some have argued that the UK economy would be damaged:

  • Economists at the London School of Economics suggest that on leaving the EU, average incomes in the UK will fall between £850 (if the UK remains in the European Economic Area) and £1,700 (if the UK faces its worst case scenario increases in trade costs) per year, and we would experience a £26 billion to £55 billion drop in GDP. These estimates do not include a consideration of any possible effect of leaving the EU on productivity in the UK.
  • The Institute for Fiscal Studies (an independent research institute) has estimated that the effect on public finances of leaving the EU would be a reduction of between £20 billion and £40 billion in 2019-20, and at least one to two years of strict austerity (in the form of spending cuts or tax rises) would be required to balance the UK’s finances.

And others that the UK economy will be in a better (or at least no worse) position:

  • If the UK were no longer a member of the EU it would no longer make an economic contribution to the EU’s budget, so that estimated £8.5 billion net contribution from 2015 would remain in the UK. However, as we don’t know what relationship the UK will have with the EU it is possible that the contribution of the UK to the EU may not fall to zero, as identified by the Institute for Fiscal Studies. In the interest of potential comparison, as a member of the EEA, last year Norway contributed at least €816 million to the EU budget (equivalent to €160 gross contribution per person, compared with the £195 gross per person the UK contributed as a member of the EU last year – there are no public figures from Norway on the economic benefits they receive so it is not possible to compare net contributions).
  • Woodford Investment Management (the business of influential investment fund manager Neil Woodford) commissioned research into the economic implications of Brexit and found that there is little reason to believe that the effect on the UK economy of leaving the EU will be negative.

All of these estimates and figures are of course speculative as it is impossible to predict accurately what the situation will be if the UK votes to leave the EU.

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